The Canadian Rational Investor's S&P 500 Blog

This is a once a week or two (depending on how active the market is) review of the S&P 500 Depository receipts (SPY:AMEX) using the weekly price chart. The analysis is primarily technical in nature including support and resistance, trend lines and chart pattern recognition. Commentary may include fundamental and seasonal analysis coupled with the technical picture. Hope you enjoy this rather unique look at the market...

Tuesday, April 15, 2014

Current SPY weekly chart: http://scharts.co/ZFMFJe
Commentary: Those that may doubt the power of the Fed should take note of our current stock market. We have been powering our way higher now for more than five years and at present I still don't see any signs of this bull slowing down. The talking heads will try to get investors to emotionally react to day to day fluctuations but the simple fact is the US Fed wants the financial system to get back on its feet and they will keep the cost of borrowing money at historically low levels until they see that has happened. Indeed, prices have risen so much we actually have a 'risky' stock market once again. While I don't foresee any break of real substance over the short term, one must respect the fact that we are fast approaching a seasonally tough window and may need to pause here before any further appreciation in price can occur. Ironically, that pause may come from geopolitical tensions rather then any locally based policies.

Rational overview:Fundamentals: Corporate earnings continue to grow and interest rates are at historically low levels. Considering these are basically the two key ingredients in stock market valuations one shouldn't be too surprised to see surging prices. The Fed has engineered a recovery in the US economy and that is exactly what they got. The current US yield curve (http://stockcharts.com/freecharts/yieldcurve.php) is very healthy and suggests there are no signs of recession anywhere on the horizon. While that may change over time, at present the economy appears to be chugging along rather nicely. There were growing fears of a new housing market bubble but hawkish talk from the Fed through the first quarter seems to have thrown some cold water on that. Indeed, that cooling has now prompted dovish talk from the Fed and the general consensus is for rates not to begin rising again in earnest until we are well into 2015. The only Caveat to all this is geopolitical tensions. Should eastern Europe erupt into a state of war, both economies and equity markets may feel the sting as commodity prices may move higher in earnest. higher energy prices alone shall act as a natural break to the economy and should prices spike dramatically we may see an economic shock. Ironically, this potential scenario may actually do the Fed's work for them putting them on hold for an even longer period of time.

Technical:We are fast approaching our typical seasonal peak in the stock market (Sell in May and walk away) and one can not help but get the feeling we are rather over extended. That in itself is not justification for either covering long positions or outright shorting but simply should be a warning to those participating that we definitely do have a bit of risk priced into this market. Considering the late January/early February lows are right on our red trend line, I for one shall be looking for that level to be tested through the seasonal trough expected shortly. This year's January Barometer report (https://docs.google.com/file/d/0B9fuWeR8s0OKRDFfelJtWEo3TlU/edit) did suggest we would see new highs through the summer. With this in mind, I shall be looking for a slight pullback through late May / early June and then a resumption of upward pressure through the late summer. Interestingly, that same January Barometer report suggested this fall may be a tough one. Considering how far away the 50% level, the 200sma and the lower trend channel line (Blue dotted) are a correction of substance shouldn't be too unexpected. That event is many months away and we shall deal with that scenario as we head out of summer and into the fall. Until then, the march higher continues in earnest.

Rational Summary: The post US housing market meltdown bull rally is now well into it's fifth year. The Fed has engineered a recovery by basically guaranteeing bank profits. Should they decide to remove their QE stimulus programs we ought to see a period where the market has to adjust. That event is not here at present. it will be one day but it is not today. Corporate profits are robust and shall continue to be so until the cost of borrowing rises in earnest. We are fast approaching a seasonally tough time for the market so a pause certainly wouldn't be unexpected. Put it all together and one is left with the impression of a market that is overextended but remains pointing higher.Trader Stance: As the market continues to make higher highs and higher lows traders have been best to buy breakouts with stops just under previous lows. one might argue bullish resolutions around the 13ema (blue moving average) have also represented interesting entries as well. As long as we keep closing price above that 13ema traders are best to remain with a long bias. Should we close below that level, traders would be best to look for a tag of the 30sma which really isn't that far behind.

Investors Stance:While the media will try to get you to panic, there is NO reason for investors to even consider liquidating positions at this point. Yes our time tested 'investor' trend indicator (that being the relationship between the weekly 13ema and the 30sma) is quite wide at this point, it is still very much bullish. Until that relationship changes, investors are best to enjoy the nice dividends being paid quarterly and appreciate the huge capital gains they are sitting on from the last 'investor' buy signal issues way back in November, 2011.

Sunday, September 1, 2013

Commentary: Here we go again. It seems to me the more I do this, the more I see the same things over and over again. In September, the US Congress must address the debt ceiling as the US Federal government is expected to run out of borrowing room shortly. One ought to recall our last experience with the political fireworks out of Washington over hitting their respective debt ceiling and how the Republican controlled US House of Representatives could literally be brought to a standstill over an issue that really is completely out of their control. Regardless, those politically motivated will use this crisis dejour to their ends. The problem is the stock market is currently over extended, pointing lower in the short term and heading into a historically questionable seasonal period. Put it all together and price feels a bit vulnerable.

Rational overview:Fundamentals:
Since the 2007-2008 meltdown in the broader US economy, the 'E' in the
P/E ratio has been steadily rising in the face of both a very
accommodative US Fed monetary policy and relatively easy earnings
comparison. That story on both fronts is now more than a few years old
and getting a bit stale. Indeed, earnings guidance has waned of late and
US Fed policy, while currently still accommodative, has turned more
hawkish. Recent talk of 'tapering' purchases of US treasuries seems to be the tightening proxy of this cycle. As Fed. speakers one by one use the term more often, they are trying to introduce an exit strategy for themselves once they feel direct intervention in the US economy is no longer required to maintain necessary growth rates. Having said that, stock prices themselves seem to dictate the pace of that tapering. Should a healthy correction in stock prices occur (like we saw in June) Fed. officials have been quick to back away from tapering talk. While that talk of late has been back on the taper side (as stock prices once again hit new highs) I find it more than coincidental how we have rolled over here heading into the showdown out of Washington and that there is a significant Fed. meeting scheduled for the week of October 31st.....didn't someone once say...'buy when it snows and sell when it goes'.....

Technical:Through the seasonal spring peak of 2013, prices came back to the 30SMA, touched a significant trendline and then rather smartly reversed to new highs. Interestingly, we are currently basically right where we were in May when we were then well advised to expected 'traders' to be short and for 'investors' to remain in their long positions. Once again that seems to be the technical outlook (traders short, investors long) as we head through the current questionable season period. Failure at the 13ema suggests a test of the 30sma ought to be in order. A daily ab=cd bear price pattern confirms a short term target in the 160 area isn't unrealistic. Indeed, a simple 50% correction of this past year's rally suggests 151.71 isn't out of the question either. One final note, considering relative investor complacency and the current position of the 200sma (some 20% lower!), one has to appreciate the considerable risk of any new purchases at or near these levels.Rational Summary: The US stock market, and 'assets' in general did well coming out of the seasonal trough but stocks in particular have not really appreciated too much from those spring peaks. As we head through a usually tough seasonal window, one has to appreciate the short term risks apparent both from the fundamental and technical sides - its a risk market! Investors are so far 'in-the-money' (last signcal for them was at 120 area) they could handle a short term pullback of as much as 10% to 15% and still be in profits. Traders are traders and will be more than happy to go long or short, whenever the potential reward vs. the risk is acceptable.Trader Stance: Traders have been given a short setup coming off the 13ema fail and the daily bear ab=cd price pattern. that objective appears to be {(170.97-164.19)-167.30} 160.52 at the moment which happens to be in and around the 30SMA currently at 160.43. 'Bot' short setups look interesting on a failed rally to fill the gap.

Investors Stance:While
the media will try to get you to panic, there is NO reason for
investors to even consider liquidating positions at this point. Yes our
time tested 'investor' trend indicator (that being the relationship
between the weekly 13ema and the 30sma) is quite wide at this point, it
is still very much bullish. Until that relationship changes, investors
are best to enjoy the nice dividends being paid quarterly and appreciate
the huge capital gains they are sitting on from the last 'investor' buy
signal issues way back in November, 2011.

Saturday, June 22, 2013

Current SPY weekly chart: http://scharts.co/ZFMFJeCommentary: Stocks go up and stocks go down - that is just the way it is. However, I find it fascinating how the public/media seem to only get really interested during the times when the market goes down. While the media plays up the recent pull back in price (no doubt a function of ratings driven news reporting - horrible) few appreciate the fact that the SPY was up more than 16% in less then six month heading into the May peak at 168 and even after the meltdown dejour, we are still up more than 10% for the year (and that is excluding dividends). As the chart above outlines, we are still very much contained within a very wide upwardly pointing price channel. Indeed, into the very typical seasonal peak (Sell in May and walk away) we actually touched the top of the channel. Could we take some time & trade back down the the bottom channel line to 'cleanup' some of the excess euphoria - absolutely. Is this an outright 'sell' signal where one ought to get out of stocks completely - no way, not even close!Rational overview:Fundamentals: Since the 2007-2008 meltdown in the broader US economy, the 'E' in the P/E ratio has been steadily rising in the face of both a very accommodative US Fed monetary policy and relatively easy earnings comparison. That story on both fronts is now more than a few years old and getting a bit stale. Indeed, earnings guidance has waned of late and US Fed policy, while currently still accommodative, has turned more hawkish. Seeming to coincide, investor sentiment hit a new cycle high in May (a reading above 90 on the S&P 500 bullish percent index: chart link) and is now in the process of coming back down to earth. Put it all together and I think one can make the argument for a 'correctionary' period for stock prices in general and a short term end to the run away bull we watched develop since the last 'investor' buy signal in November, 2011.Technical:As pointed out in the chart above, prices had moved so far that we ended up (through the later part of May) brushing up against the upper channel of the current upwardly pointing price trend channel. The move into the 168 area on the SPY represented a 16% appreciation since the beginning of the year. While we may end the year at or near these levels, a further continuation heading out of the seasonally bullish window seems unlikely. The 13ema and 30sma are very wide at the moment so a period of consolidation to bring those two moving averages back near each other seems realistic too. Lastly, price itself has a 'double top' working which further suggests a 'correction' is underway in equity prices.Rational Summary: As our typical seasonal 'peak' window has now come and gone (Sell in may and walk away)
one shouldn't be surprised to see stock prices have cooled. The fact that so many in the media are calling for a collapse (yet our time tested 'trending' indicator is still very much bullish) suggests to me investor sentiment is undergoing a very natural correction within a broader bull market. The US Fed has NOT raised interest rates but has suggested they may end their QE programs IF the market warrants it. I would argue the market will remind the Fed that QE is still necessary - the question is, how big of a pull back in price does the Fed need to start turning the printing presses back on? 10%, 20%, 30%....too hard to judge at this point.Trader Stance: Traders who exited their long positions in early May (at really good reward to risk levels) were forced to watch the market slowly grind higher into the end of the month. While no specific sell patterns were evident one just had to sit, watch and patiently wait for a setup to develop. The recent drop in prices suggests a trader short setup may be in play. The recent double top in price suggests on could be short from the 13ema fail at or near the 159.41 level with corresponding stops just above recent highs at 165.12 (or about 5.5 points of risk). To justify this risk one really ought to see at least 11 points in potential profit. The lows of April 15th at 152.74 look to be right at the 30SMA and would be my target going forward. That would equate to about 7 points of profit and (in my opinion) NOT worth the risk. Should we get a rally back up to test those highs at or near the 165 area, I might be inclined to take a look at the trade at that point.Investors Stance:While the media will try to get you to panic, there is NO reason for investors to even consider liquidating positions at this point. Yes our time tested 'investor' trend indicator (that being the relationship between the weekly 13ema and the 30sma) is quite wide at this point, it is still very much bullish. Until that relationship changes, investors are best to enjoy the nice dividends being paid quarterly and appreciate the huge capital gains they are sitting on from the last 'investor' buy signal issues way back in November, 2011.

Sunday, March 17, 2013

Hi there, and welcome back to CRI's S&P 500 blog.
Our peak at the SPY (S&P 500 depository trust units):Current SPY weekly chart: http://scharts.co/ZFMFJeCommentary: Once a market gets a head of steam behind it, it is both foolish and rather financially dangerous to start 'picking tops'. Indeed, this past month has witnessed countless professionals exclaim 'this is the top' only to be embarrassed. Is the market overbought - unequivocally yes. Is it a short - unequivocally no! Regular readers will recall the title of my last SPY Blog post - Don't get run over by this bull. I sure hope you didn't.Rational overview:Fundamentals: Two month's ago analysis seems to continue to be correct..."the 'E' in current P/E ratios is still rather
healthy. Additionally, the US Federal Reserve Board's current low short
term interest rate policy is supportive of both yield curve driven
earnings and the general cost of doing business going forward. Put it
all together and one can make the argument that the underlying
fundamentals for corporate profits look ok going forward. Lastly,
investor sentiment is currently rather poor. Last summer investors got a
little ahead of themselves (with the likes of AAPL etc.) but now much
of that euphoria is gone. Sanguine investors don't make the backdrop for
stock market crashes. - corrections, maybe - crashes, no." As of
this month, the Fed is humming and hawing over when to end QE. Until
that event, I shall be looking at US Fed. interest rate policy as market
supportive. As for the market's reaction, I shall be watching the US Yield curve
for an indication of anticipated economic expansion (normal yield
curve) or contraction (inverted yield curve). As for sentiment, AAPL's
collapse has washed many of those 'weak hands' out of the market. It is
now the market's job to suck them back in.
Technical:While last month's post was on the heels of a dramatic bullish resolution to the 'fiscal cliff', this month's post comes in the face of two significant technical barriers (bullish extension target 158.89 and bullish ab=cd target 154.43). While the former remains open, the later target has now been hit. Additionally, the market has become quite violent and is now almost 10% above our short term moving average (weekly 13ema) suggesting a correctional period may be fast approaching.
Seasonal: Comments from last month's post still seem to be relevant: 'Buy when it snows, sell when it goes...'
seems to be appropriate here. From now until the end of May is the
proverbial 'sweet spot' for the economy in general and the stock market
in particular. Bob Pasani (a favorite market commentator of mine)
recently did a write up on seasonal tendencies in the market and the January Barometer.
I highly suggest you take a look if you have a moment. The January
Barometer itself was rather market friendly (suggesting an up year for
the market for 2013) and as pointed out above, the market is currently
in a very seasonally friendly time of year. That in itself doesn't
guarantee price performance, but it does suggest the wind is at our
backs for the next few months, not in our faces...Rational Summary: As our typical seasonal 'peak' window fast approaches (Sell in may and walk away) the market has moved higher in earnest. Over the course of the post 'fiscal cliff' rally traders were given a fabulous 2:1 risk/reward trade that should have been exited over the past week and investors have built an even further cushion to their purchases made in November 2011. While there is no 'top' in place as of yet, certainly no new long positions should even be considered until we consolidate some of these gains.
Trader Stance:
Traders were given the green light to get back in on the long side of this market when prices broke their highs at 144.55 on the bullish resolution to the 'fiscal cliff'. The break back above the previous peak represented both a 'key
reversal' and a short term bullish ab=cd price pattern. While buying the
13ema touch was the correct 'knife catching' trade (and boy where they
rewarded) a more conservative trader ought to have bought the reversal
at 144.55. Since the trade itself had about $5.00 in risk (stops just below the reversal low of 139.54) a 2:1 risk reward model would suggest taking profits at or above $154.55; and as pointed out above, that trade should have been filled this past week. WTG Traders!Investors Stance:
I hate to say it for you investors out there....but more of the
same....last month's post was spot on so I don't see any reason to
change it..."While this commentary may sound boring and very repetitive, this camp
has been well advised to be long and stay long for more than a
year now. Those that took last year's investor 'buy' signal are well
into double digits returns (if not more) considering dividends. As long
as the 13ema remains above the 30sma I see no reason to touch long
positions at the moment. Be long and stay long as we collectively climb
the 'wall of worry'."

Saturday, February 9, 2013

Commentary: I find it fascinating to watch cycle after cycle (I have been doing this now for almost 20 years and this blog in particular for 5 years) as we humans repeat the exact same behavior and yet each time we expect a different result - didn't someone famous say something about exactly that? At the time of my last SPY blog post (mid December) I found it very hard to find too many outright bulls and even today, still seem to encounter a fair amount of resistance to the idea of the market moving higher. But in very typical fashion, the market charged higher on that sanguine sentiment, broke to new highs and has further pulled a few more of those previous bears over to the bull's camp. The fiscal cliff turned out to be a pothole at worst and in very market friendly way (and completely expected...I might add) Washington did absolutely nothing on the issue. The fundamental backdrop for stocks has been rather good of late and it is interesting to see (because of a project I have been working on specifically within the field - WDB Options Pricing Model) many smaller companies are starting to outperform on what I would consider very reasonable fundamental valuations. The Russell 2000 (small cap benchmark) broke to new highs a while ago and has been leading this bull charge which seems to further confirm this notion. Ironically enough, it will only get dangerous to own stocks again once everyone else likes the idea. As I post this blog, the market is charging to new highs and looks to be heading even higher. Are we near a blow-off top? That is hard to say, but we are fast approaching two technically substantial upside targets so a euphoric melt-up into that area certainly isn't out of the question. Keep in mind, markets are often most volatile at the tops and bottoms of moves, so given the recent rather orderly move to new highs, price action itself isn't suggesting an end just yet. If you see some violence, then we may be getting closer.

Rational overview:Fundamentals:
Last month's analysis seems to continue to be correct..."the 'E' in current P/E ratios is still rather
healthy. Additionally, the US Federal Reserve Board's current low short
term interest rate policy is supportive of both yield curve driven
earnings and the general cost of doing business going forward. Put it
all together and one can make the argument that the underlying
fundamentals for corporate profits look ok going forward. Lastly,
investor sentiment is currently rather poor. Last summer investors got a
little ahead of themselves (with the likes of AAPL etc.) but now much
of that euphoria is gone. Sanguine investors don't make the backdrop for
stock market crashes. - corrections, maybe - crashes, no." As of this month, the Fed is humming and hawing over when to end QE. Until that event, I shall be looking at US Fed. interest rate policy as market supportive. As for the market's reaction, I shall be watching the US Yield curve for an indication of anticipated economic expansion (normal yield curve) or contraction (inverted yield curve). As for sentiment, AAPL's collapse has washed many of those 'weak hands' out of the market. It is now the market's job to suck them back in.

Technical: 'Show me a new high, and I'll show you a buy...' seems to be appropriate here. The trading range established into the fiscal cliff resolved bullishly. Those traders that took the OTE short trade heading into the event ought to have been stopped. As pointed out in my last commentary, the bullish stance on the MA's (13ema > 30sma) suggested the bears where in for a tough fight and indeed the market turned right back up as price entered that support area. Either the bullish resolution of that test (buy the 13ema with 2:1 r/w) or the subsequent reversal breakout (bull ab=cd on move back above 144.55 with stops just below 139.54) should have swept traders long . On the reversal trade the risk is about $5.00 so a 2:1 r/r model would have traders looking to book profits at or above the 154.55 area. Based on the working bull ab=cd pattern target (155.12) that doesn't seem unrealistic.

Seasonal: 'Buy when it snows, sell when it goes...' seems to be appropriate here. From now until the end of May is the proverbial 'sweet spot' for the economy in general and the stock market in particular. Bob Pasani (a favorite market commentator of mine) recently did a write up on seasonal tendencies in the market and the January Barometer. I highly suggest you take a look if you have a moment. The January Barometer itself was rather market friendly (suggesting an up year for the market for 2013) and as pointed out above, the market is currently in a very seasonally friendly time of year. That in itself doesn't guarantee price performance, but it does suggest the wind is at our backs for the next few months, not in our faces...

Rational Summary: Price has resolved bullishly heading out of the 'fiscal cliff' and given the rather friendly fundamental backdrop will probably continue to do so into the next political showdown out of Washington. Technical targets suggest the mid to high 150's aren't out of the question and unless we get some horrendous reversal I can't see our slow march higher stop until those levels are hit (and even exceeded). In either case (trader or investor) if you are not currently 'in' then it seems a little too late to chase this bus, the next one will be along in ten minutes....

Trader Stance: Aggressive traders where short heading into the fiscal cliff (OTE Short SS entry) but were rejected when price couldn't break back below the MA's. The break back above the previous peak represented both a 'key reversal' and a short term bullish ab=cd price pattern. While buying the 13ema touch was the correct 'knife catching' trade (and boy where they rewarded) a more conservative trader ought to have bought the reversal at 144.55. As pointed out above, that trade has (and still does have) about $5.00 of risk (stops just below the reversal low of 139.54) so using a risk reward model of 2:1 would have them looking for at least $154.55. And as pointed out above, that target area isn't unrealistic given the two rather significant looming upside technical targets.

Investors Stance:
I hate to say it for you investors out there....but more of the same....last month's post was spot on so I don't see any reason to change it..."While this commentary may sound boring and very repetitive, this camp
has been well advised to be long and stay long for more than a
year now. Those that took last year's investor 'buy' signal are well
into double digits returns (if not more) considering dividends. As long
as the 13ema remains above the 30sma I see no reason to touch long
positions at the moment. Be long and stay long as we collectively climb
the 'wall of worry'."

Sunday, December 30, 2012

The final week of 2012 brings us all to a very interesting point in the market. Due to political gridlock from Washington it would seem we here in North America are going to jump off the 'fiscal cliff' in unison come January 1st, 2013. Considering this was a term coined by a US government official, there really isn't any telling exactly what is going to happen to the North American economy once the calendar turns, but it is very interesting to watch the collective psychology of 'investors' as they hum-and-haw over the possibilities. Fundamentally, one could make the argument that the US government's balance sheet has long been due for some cleaning up and the broader market drivers (interest rates & corporate profits) are actually very supportive of higher not lower stock prices. Additionally, markets love split democratically elected governments. The more gridlock, the less that can be done to tinker with the market's underlying fundamentals. The 64k question really seems, do we get caught up in the short term 'panic' or do we approach our market participation from a Rational perspective and not get caught up in the short term hoop-la.Rational overview:Fundamentals: As pointed out above, the 'E' in current P/E ratios is still rather healthy. Additionally, the US Federal Reserve Board's current low short term interest rate policy is supportive of both yield curve driven earnings and the general cost of doing business going forward. Put it all together and one can make the arguement that the underlying fundamentals for corporate profits look ok going forward. Lastly, investor sentiment is currently rather poor. Last summer investors got a little ahead of themselves (with the likes of AAPL etc.) but now much of that euphoria is gone. Sanguine investors don't make the backdrop for stock market crashes. - corrections, maybe - crashes, no.Technical: This market is a bit overdue for some sort of corrective price action. We have basically been heading straight up for more than a year now and find ourselves quite far away from serious support (200 period simple moving average - our 4 year business cycle - is currently more than 17% lower than current prices). Additionally, there are noticeable gaps to the downside (in that 200sma area) that ought to be filled in at some point down the road. Even a move back to our time tested '50%' level would imply a better than 10% correction from where we are now. Finally, as hopefully you can see from the chart above, the market is currently working a 'bullish wedge' pattern (Notice the converging Red and Blue trend lines). Unfortunately, these types of patterns often resolve themselves bearishly. Seasonal: The seasonal underlying drivers were supportive of price moving higher into the end of the year both from a regular annual event driven basis (Santa Clause rally) and from the US Presidential election year cycle forces. Unfortunately, that bullish window is closing and typically the period from the first week of January through the middle of February has been met with selling pressure since the beginning of the current 'fear' cycle back in 2001. This seasonal tendency shall continue for another five years (into anticipated peak Q3'17) and there is no reason to suspect otherwise this go round. Once through the middle of February we ought to see our regular seasonal pressures drive prices higher into the spring but that is at least a month and a half away.Rational Summary: Put it all together at it would seem to me we are due for some price consolidation. But that does not mean we have broken down. Indeed, at worst, one can argue we are stuck in a very wide trading range at the present (146.29 to 133.75). Fundamentals would still support higher prices over the medium term but maybe a period of technical 'cleaning-up' is in order. With that said, one should determine what kind of market participant you are and then act accordingly.Trader Stance: Traders have been given a nice shorting opportunity heading into the end of the calendar year with the rally into the daily OTE Short SS (70.5% retracement of previous sell-off) at 142.59. With stops just above the old highs 146.30 area (4 points of risk) and targets near the recent lows 133.75 (9 points of reward) this represented an attractive 2:1 reward to risk ratio. Aggressive traders could add to their short positions on the close below the 13ema (with stops on the added position just above last week's high). But given the fact that our 'fast' indicator (13ema) is still well above our 'slow' indicator (30sma) I don't think we are quite ready to break down in earnest just yet.Investors Stance:
While this commentary may sound boring and very repetitive, this camp has been well advised to be long and stay long for more than a
year now. Those that took last year's investor 'buy' signal are well
into double digits returns (if not more) considering dividends. As long
as the 13ema remains above the 30sma I see no reason to touch long
positions at the moment. Be long and stay long as we collectively climb
the 'wall of worry'.

Sunday, December 16, 2012

While surfing the web I came across an interesting blog entry from Avondale Asset Management on the Santa Claus rally and its effect on stock prices in general through the end of year holiday season:

So here we are at the end of another year. 2012 is almost behind us but doesn't seem to want to go out without a bang. As was posted in our last entry, stocks themselves looked to be 'climbing-the-wall-of-worry' heading into and now out of the 2012, US Presidential elections. Historically, markets often do quite well coming out of October and into the end of the year and because of the US Presidential cycle's influence it seemed as though this year would be very much like others of the same ilk. Indeed, prices have slowly chopped their way higher over the past month or two and there still is no solid reason to abandon what has turned out for investors, to be a very fine trade. Regular readers will remember that our 'investor camp' was given the 'buy' signal (based on our time tested weekly 13ema/30sma cross over system) a little over a year ago. The capital gain on the trade alone is more than 18% and if you included dividends it is well over 20%. As long as that moving average relationship remains bullish then we are best to just sit back and leave the trade alone. Having said all that, one must respect the 'nose-bleedy' territory the market is currently within. As the chart above illustrates, we recently bumped up against a resistance line (red dotted line) and failed. Should we reverse and start closing below the support lines (blue dotted lines) we may see the end of this current rally. Given that backdrop, it should also be noted, price are indeed currently over-extended. A 50% retracement of the last year's rally represents almost a 15% correction in price from current levels. Notice too how far away our 200 week sma (or our 4 year business cycle moving average) is. Real support in price ironically is back around where our 'investor camp' last bought in. Should a correction in earnest occur through the early part of 2013 (fiscal cliff worries et all) we may see our 'investors' get a chance to buy their investments back at the prices they paid a little over a year ago.

Trader Stance:
Traders were given a shorting opportunity on the double top and subsequent break of the weekly 13 ema about eight weeks ago. That pattern was quickly reversed when prices rejected the weekly 30 sma touch and we have basically rallied since then. Traders may consider OTE Short SS entries at or near a 70.5% retracement of the recent trading range [0.705(147.32-134.7)+134.7=143.59]. Stops would be at least 10 ticks above those highs at 147.32 and targets would have to be at least two times risk. Should one take the OTE short, traders would be well advised to take partial profits on a test of recent support at or near 134.70.Investors Stance:
This camp has been well advised to be long and stay long for more than a
year now. Those that took last year's investor 'buy' signal are well
into double digits returns (if not more) considering dividends. As long
as the 13ema remains above the 30sma I see no reason to touch long
positions at the moment. Be long and stay long as we collectively climb
the 'wall of worry'.

Disclaimer

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